Surety Bonds 101
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How to Get Bonded and Insured
Your Complete Guide With Everything You Need to Know
When starting a new business, most entrepreneurs begin their research by asking, how do I get bonded and insured?
Getting bonded provides great comfort to potential clients and insurance protects businesses from risks that could put them out of business.
Therefore, it’s crucial for all business owners to perform their due diligence to determine adequate insurance coverage and learn how to get bonded.
How to Become Bonded
In order to become bonded, you must first determine whether you need a surety or fidelity bond.
The important difference between the two is that surety bonds are required by a third party (usually the government) to protect itself or the public.
Fidelity bonds are insurance for you or your business.
These typically protect your business from employee theft.
Getting Bonded and Insured: Do You Need "Bond Insurance"?
Learning how to become bonded and insured is important for any business owner. It can often be a mistake to purchase your bonds and insurance together (often incorrectly referred to as "bond insurance").
Not everyone qualifies for surety bonding. So rather than asking how do you get bonded, a more appropriate question might be, can I be bonded?
The majority of insurance agencies can help you to get bonded, but unfortunately do not properly understand the bond market or have the resources to properly assist you in the event of a claim.
Insurance agencies know how to get you insured best, but often broker their bond business to a bond MGU that knows how to handle claims and get you the best rate. This puts a middleman into the mix, which could result in delays and increased costs, both with your rate and the handling of potential claims.
What Does "Bonded" Mean?
You want your company to become licensed, bonded, and insured to provide your clients peace of mind, but likely don’t know what it means. Many mistakenly lump insurance and bonds together into the same category seeking out “bonded insurance”.
While insurance and bonds have commonalities, they are different products. So, what does it mean to be bonded and insured?
In this article, we’ll get bonded defined so that you understand the difference for your newly bonded business and your clients.
What is “Bonded”?
So, how do bonds work and why can’t most insurance agents provide anything other than a vague “bonded” definition?
The confusion stems from there being two different bond products that most licensed insurance agents don’t understand.
Both allow you to market as a bonded company, but they have different purposes.
Surety bonds create a potential liability for your company, but are required of you by a third party (typically the government) to do business. There are thousands of surety bond requirements throughout the U.S. You can search for your surety bond requirements by state in our database. If you are required to post a surety bond, it is imperative that you understand them by reading our article, “What does surety bond mean?”.
Fidelity bonds provide insurance for your company against employee dishonesty and theft. Should a bonded employee embezzle funds, the fidelity bond will reimburse your company for losses. Usually, they are not required, with the exception of ERISA bonds to protect employee benefit plans.
Which Bond Do You Need?
How to Get a Surety Bond
At this point you are likely asking, how do I get a surety bond? Surety bonds are offered by the industry through licensed agents. Unfortunately, the required license falls under property and casualty insurance, so most agents offering bonds primarily sell insurance products and do not fully understand the surety markets or how to assess your liability.
When it comes to surety bonds, you are responsible to pay for claims. Therefore, the question you should be asking is where do I get a surety bond? It’s imperative that you obtain a surety bond from an agency that either has a full-fledged bond department or exclusively offers bonds.
The majority of agents do not know how to get a surety bond with bad credit. Not everyone qualifies for surety bonds, so applicants with credit issues need to be placed with a high risk bond program. Most agents do not have direct access to these specialty high risk bond programs, and will likely broker your bond to a large bond agency with access.
Getting Licensed & Bonded
One of the most common surety bond requirements is a license bond. So how do you get licensed, bonded and insured?
Like all surety bonds, license bonds must be required by a third party. If your profession does not require a license, you cannot get licensed and bonded, but should still get insured. If your line of work does require you to obtain a license, you’ll need to ask if a surety bond is required to be posted with your application. You can also search our database of license bond requirements by state.
Bonded vs. Insured
When businesses advertise that they are “bonded”, they could be referring to their surety or fidelity bonding. Fidelity bonds are an insurance product for your company, while surety bonds are insurance for the obligee (party requiring you to post the bond). Fidelity bonds work in the same way as property and casualty insurance that most are familiar with. However, surety bonding is quite different, as you are expected to reimburse the surety for claims.
This makes surety bonds a form of credit to you. The alternative is usually to post cash in the form of a letter of credit. A letter of credit will require you to 100% collateralize the funds with the bank. When it comes to surety bonds, collateral is almost never required, meaning they are guaranteeing “you are good for it” when it comes to paying claims.
What Does Licensed & Bonded Mean?
Many occupations require you to obtain a license to operate your business. At times, a surety bond is required to guarantee that you follow the rules of the license. Should you break them, a claim could be filed on your bond.
Not all business licenses require a surety bond to be posted. To see if yours does, you can search the surety bond requirements by state. If your industry does not require a license bond, you can always obtain fidelity bond coverage to protect your clients from your employees stealing from them. This will still allow you to provide the peace of mind your clients are looking for when you tell them you are licensed and bonded.
To become a bonded contractor, you must first determine whether you are being bonded for a job or to work in a geographic location.
Contract bonds are what guarantee your work on a specific job (the most common being bid bonds, performance and payment bonds). Usually, contract bonds guarantee construction of public work. There is quite a bit to learn on how these bonds work. If you are new to contract bonding, our contractor’s construction bond guide is a great starting point. If you have the basics down, you might want to explore the two most common contract bond types in our guides below.
Cost of Getting Bonded
At this point, you may be wondering, how much does it cost to get bonded and insured? While insurance products have become increasingly commoditized over the years, surety bond costs are not one size fits all. The surety bond rate is determined by an underwriter who assesses your risk of triggering a claim. Keep in mind, surety bonds are not insurance for your company, but a form of credit to you.
To determine costs, you need to get a quote from a licensed surety bond provider. If an agency is advertising a set cost for a bond, they are almost always listing the lowest possible rate, not necessarily what you’ll be paying.
Now that you know the basics of surety bonding, you may be asking, how do I get bonded for my business? Fidelity bonds provide insurance protection for your company. There is a wide range of fidelity bonds. For example, employee dishonesty bonds insure your company from theft or damage should an employee commit forgery or embezzle funds.
Some fidelity coverage is specific to certain lines of work. One familiar to most is a janitorial and cleaning bond, as the coverage provides homeowners and businesses they service peace of mind that the company can reimburse them in the event of theft. There are some fidelity bonds that are appropriate for any business. ERISA bonds are one of the few fidelity bonds required of businesses, as they protect employee benefit plans.
It’s important to know that fidelity coverage protects your business and more than one fidelity product may be a good fit for your needs.
The Consumer’s Guide to Surety Bonds E-Book
If you want the most thorough answers available to all of the fundamental questions related to getting a surety bond (such as "how do you get bonded and insured?"), you can download our free "Consumer's Guide to Surety Bonds" e-book. The topics covered in the e-book include:
- How surety bonds work
- How indemnity agreements affect you
- The various surety bond types required
- Surety bond pricing
- How to get bonded
- How claims affect you
This e-book was created with first time applicants in mind, and is an excellent resource if you're unfamiliar with how surety bonds work, pricing and how they can greatly affect you or your business.
While most business owners are interested in getting bonded, there are different bonds that serve different purposes. Surety bonds are required by the government to protect the public. Some surety bonds are required of businesses to obtain a license, while contract surety bonds are required for specific jobs. Fidelity bonds are typically in place to protect the business itself and are at times a requirement as well.
Bonds are often misunderstood, even by insurance agents licensed to sell them. To ensure that you obtain the correct bonds, at a good rate, and with superior claims support, it’s important to work with an agency that specializes in bonds and not insurance.